Issues in Measuring Knowledge: The Contribution of R&D and ICT to Growth Jacques Mairesse* and Yusuf Kocoglu** Advancing Knowledge and the Knowledge Economy Conference at the National Academies, Washington, DC January 2005 * CREST-INSEE and NBER ** CEDERS, Université de la Méditerranée

J.Mairesse - Y.KocogluWashington,10-11 Janvier “Beyond indicators of knowledge activities and linkages, it is the measurement of the economic and social outcomes of these activities and linkages that is key to evidence-based policy making”, Fred Gault. “Growth performances has been the subject of increasing scrutiny over recent years, a problem that Europe has addressed very aggressively… [and] the US experience is looked in order to explain the EU-US differences in productivity performances”, Reinhilde Veugelers.

J.Mairesse - Y.KocogluWashington,10-11 Janvier Outline Part I: Setting the Stage –A Few Numbers: R&D and ICT in France and the United States, in the Overall Economy and in the Business Economy –A Few Words and Formulas: Growth Accounting, and the Contribution of R&D and ICT capital Services to Growth Part II: Defining Three Conceptual Variants Part III: Comparing R&D and ICT Contributions to Growth Part IV: In Guise of Conclusion

J.Mairesse - Y.KocogluWashington,10-11 Janvier Investment in R&D and ICT in France, in the Overall Economy In 2000, R&D investment was slightly greater than ICT investment, respectively about 2.2% in proportion of GDP (31 billions euros) and 2.0% (28 billions euros). Until the beginning of 90s, R&D intensity was roughly twice larger than ICT intensity. But after 1993, while ICT intensity strongly increased (from 1.2% up to 2.0%), R&D intensity decreased significantly (from 2.4% to 2.2%). Scope: Overall Economy

J.Mairesse - Y.KocogluWashington,10-11 Janvier R&D and ICT in France, in the Business Economy In 2000, R&D investment was significantly smaller than ICT investment, respectively about 1.8% in proportion of GVA (19 billions euros) and 2.2% (24 billions euros). Until the end of 90s, R&D intensity was larger than ICT intensity. Scope: Business Economy However since 1990, R&D intensity has leveled (at about 1.9%), while ICT intensity has strongly increased (from 1.5% to 2.3%)

J.Mairesse - Y.KocogluWashington,10-11 Janvier R&D and ICT in the United States, in the Business Economy In 2000, R&D investment was much smaller than ICT investment, respectively about 2.4% in proportion of GVA (199 billions dollars) and 4.8% (402 billions dollars). Since the mid 90s, while ICT was very rapidly increasing (from 3.0% to 5.0%), R&D has been slowly but significantly increasing (from 2.0% to 2.5%) Scope: Business Economy

J.Mairesse - Y.KocogluWashington,10-11 Janvier R&D in France and the United States, in the Business Economy In 2000, R&D was about 1.8% of GVA (19 billions euros) in France and about 2.4% (199 billions dollars) in the USA. Since the mid 90s, R&D intensity in France has been stagnating (at about 1.9%), while significantly increasing in the USA (from 2.0% to 2.5%). Scope: Business Economy

J.Mairesse - Y.KocogluWashington,10-11 Janvier ICT in France and the United States, in the Business Economy In 2000, ICT was about 2.2% of GVA (24 billions euros) in France and about 4.8% (402 billions dollars) in the USA. Since the mid 90s, ICT intensity in France has been rapidly increasing (from 1.4% to 2.3%), though much less so than in the USA (from 2.4% to 4.8%). Scope: Business Economy

J.Mairesse - Y.KocogluWashington,10-11 Janvier  Y/Y =  A/A+  i  i  L i /L i +  j  j  K j /K j where -  Y/Y is the annual rate of growth of output (GDP for overall economy, GVA for business economy,…), -  Li /Li and  Kj/Kj are respectively the annual rates of labor of type i and capital of type j, -  A/A is the annual rate of growth of total factor productivity (TFP), computed as the “residual”, -  i = w i L i /pY is the share of labor services of type i, -  j = c j K j /pY is the share of capital services of type j. Review on Growth Accounting (1)

J.Mairesse - Y.KocogluWashington,10-11 Janvier  Y/Y =  A/A+  i  i  Li/Li +  j  j  Kj/Kj … and where c j = (i +  j -  p j /p j )* p j is the user cost of capital of type j with i being the net rate of return to capital,  j being the depreciation rate of capital of type j, p j being the price of investment of type j, and  p j /p j the corresponding annual price changes. Review on Growth Accounting (2)

J.Mairesse - Y.KocogluWashington,10-11 Janvier Thus the contributions of R&D and ICT capital services to growth are given by: (i +  j -  p j /p j )* (p j K j /pY) * (  K j /K j ) for j = R&D, TIC, and depend on the relative user cost of capital, the capital-output ratio (in value), and the rate of growth of the stock of capital (in “volume”, i.e., adjusted for pure price changes,but taking into account quality changes). Review on Growth Accounting (3)

J.Mairesse - Y.KocogluWashington,10-11 Janvier The relative user cost of capital (i +  j -  p j /p j ) is simply the sum of i, the net rate of return to capital, of  j, the depreciation rate of capital (of type j), and of  p j /p j the rate of price change. The capital-output ratio (p j K j /pY) and the rate of growth of the stock of capital (  K j /K j ) are themselves indirectly function of the  j ’s and the  p j /p j ’s, and on the annual investment series p j I j(t) in value. Review on Growth Accounting (4)

J.Mairesse - Y.KocogluWashington,10-11 Janvier This is because the stock of capital series K j are themselves (most generally) estimated by the so-called “permanent inventory” method on the basis of the investment series I j (in “volume”, i.e., adjusted for pure price changes but taking into account quality changes), on the basis of the recursive formula: K j(t) = (1-  j ) K j(t-1) + I j(t-1) Review on Growth Accounting (5)

J.Mairesse - Y.KocogluWashington,10-11 Janvier Usually, in growth accounting analyses, the rate of return to capital is equal to the long-term interest rate [ or it is calculated as the internal rate of return ensuring the assumption of constant returns to scale over all factors of production- see for example Jorgenson and Stiroh, 2000 ]. In the case of R&D, it is appropriate to take into account the positive research spillovers, and thus to consider a social rate of return of R&D, higher than the private rate of return. The Net Rate of Return to Capital “ i ”

J.Mairesse - Y.KocogluWashington,10-11 Janvier Usually, in the estimation of capital stocks and in growth accounting analyses, the depreciation rate of capital is taken constant (thus assuming a a geometrically declining depreciation schedule). In the case of R&D, it is appropriate to allow for the fact that the social returns are spread out on a longer period than the private returns, and thus to adopt a social rate of depreciation of R&D smaller than the private rate. The Depreciation Rate of Capital “  ”

J.Mairesse - Y.KocogluWashington,10-11 Janvier Usually, in the National Accounts and in growth accounting analyses, investment prices are (or should be) adjusted for quality changes For ICT, this is the case to a large extent in the USA National Accounts, as concern hardware, a large part of software and a small one for telecommunication equipment (using in particular hedonic methods for quality adjustment). This is also the case to a lesser extent in the French national Accounts. For R&D, for lack of official price index, GDP price is often simply adopted. However, the issue of quality adjustment is also relevant for R&D. The Investment Price Changes “  p/p ”

J.Mairesse - Y.KocogluWashington,10-11 Janvier Rate of Price Change (  p j /p j ) Rate of Depreciation (  j ) Rate of Return (i) R&D- V1GDPPrivate R&D- V2GDPSocial R&D- V3GDP+ Quality effectSocial ICT- V1GDPPrivate ICT- V2GDP+ “Full” Quality effect Private ICT- V3GDP+ “Non-R&D” Quality effect Private Three Conceptual Illustrative Variants (1)

J.Mairesse - Y.KocogluWashington,10-11 Janvier Price Change (  p j /p j ) (relative to GDP price) Rate of Depreciation (  j ) Gross Rate of Return (i +  j ) Net Rate of Return (i) R&D- V1015%25%10% R&D- V2010%50%40% R&D- V3-3%10%50%40% ICT- V1025%25%35%35%10% ICT- V2-10%25%25%35%35%10% ICT- V3-5%-5%25%25%35%35%10% Three Conceptual Illustrative Variants (2)

J.Mairesse - Y.KocogluWashington,10-11 Janvier Scope: Business Economy Growth Rate of R&D Capital in the United States (  K j /K j )

J.Mairesse - Y.KocogluWashington,10-11 Janvier Scope: Business Economy Share of R&D Capital Services in the United states [(i +  j -  p j /p j )* p j K j /pY]

J.Mairesse - Y.KocogluWashington,10-11 Janvier Scope: Business Economy Contribution to Growth of R&D Capital Services in the United States [(i +  j -  pj/pj)* (pjKj/pY)]* (  Kj/Kj)

J.Mairesse - Y.KocogluWashington,10-11 Janvier R&D and ICT Contributions to Growth in the United-States – Both Variant V1 Scope: Business Economy

J.Mairesse - Y.KocogluWashington,10-11 Janvier R&D-Variant V1 and ICT-Variant V2 Contributions to Growth in the United-States Scope: Business Economy

J.Mairesse - Y.KocogluWashington,10-11 Janvier R&D and ICT Contributions to Growth in the United-States – Both Variant V3 Scope: Business Economy

J.Mairesse - Y.KocogluWashington,10-11 Janvier V V V Contributions of R&D Capital to Growth in the United States and in France V V V Scope: Business Economy France United States

J.Mairesse - Y.KocogluWashington,10-11 Janvier R&D and ICT Contributions to Growth: Comparison between France and the United States United-States=1, Variant V3.

J.Mairesse - Y.KocogluWashington,10-11 Janvier Conclusions (1) The estimated contributions of R&D and ICT in the standard growth accounting framework both crucially depend on the estimated rate of price changes, and particularly on the size of quality adjustment, and the trade off between what part of it is imputed to R&D activities upstream, or downstream to production activities in ICT industries. The estimated contribution of R&D also crucially depends on taking research externalities into account, by using social rates of return and depreciation, not private rates.

J.Mairesse - Y.KocogluWashington,10-11 Janvier Conclusions (2) Correctly computed, the estimated contribution of R&D is of a comparable order of magnitude than that of ICT, in the recent years since the mid 90s, in the United States and in France. The estimated contribution of R&D is not small relative to that of ICT, in the recent years, in the United States, contrary to the message that some (of the many) growth accounting studies tend to convey.

J.Mairesse - Y.KocogluWashington,10-11 Janvier Conclusions (3) In the recent years, since the mid 90s, the contribution of R&D to growth, in the business economy (also the overall economy at large), has been stagnating in France, while increasing in the United States. The contribution of ICT to growth in France has been increasing very significantly in France as in the United States, but less rapidly The situation in France, relative to the situation in the United States, is more worrisome as concerns R&D investment than ICT investment, contrary to the implicit view of many policy makers.

J.Mairesse - Y.KocogluWashington,10-11 Janvier Conclusions (4) The new System of National Accounts (SNA), currently under discussion, should, at last, consider and treat R&D as an investment. Barbara Fraumeni, our Chair, has certainly mentioned this issue or will now mention it. …